JSE-listed Sun International released its half-year results on Monday, reporting a 6% increase in earnings before interest, tax, depreciation and amortisation (Ebitda) and income growth up 4%.
The group attributes the results to its shift in focus and a strategic realignment centred on improving efficiencies and reducing costs over the past year. The hotel and casino operator saw its new Time Square casino and hotel precinct in Pretoria achieve income of R582 million.
Time Square, which opened at the end of March 2018, achieved 40% occupancy at a room rate of R1 112. The new hotel’s Ebitda was reported at R130 million. However, Sun International CEO Anthony Leeming noted that: “The problem with Time Square is it has high depreciation costs and when you get down to adjusted headline earnings, this drops down profits significantly.”
Leeming’s concern was reflected in the group’s share of the losses from Time Square increasing from R63 million in the prior corresponding period to R182 million.
Operational performance in Latin America was subdued and largely attributable to a low growth economy and a tragic shooting incident that took place at Monticello in Chile in July 2017.
The group reiterated its commitment to driving down debt and concluded a R1.6 billion equity raise in June, using the proceeds to reduce its South African debt. Leeming remarked: “While gearing remains high, we are confident that consistently strong cash generation will continue to reduce debt levels over time.”
Casino operations were also impacted by the current economic climate in South Africa, with comparable casino income increasing by 2%. Sun Slots continued its strong performance, with income and Ebitda up 12% and 11% respectively. Rooms revenue dropped 3%, partly due to the pressure on disposable income and the water crisis in Cape Town.
The increase of value-added tax (Vat) to 15% on April 1 also had an impact. Leeming told Moneyweb that there are two elements to Vat. “Obviously the consumer comes under pressure, and you can’t separate that,” he said. Then there is the fact that there is no offset: “We have to pay the Vat on whatever we keep, and on that basis it comes with a direct cost. That in itself cost us R19 million in the three months that [the higher rate of] Vat was in place.”
David Shapiro, deputy chairman at Sasfin Securities, says Vat is just one part of the story. “It is an economy that is not growing – so, overall, you have consumers that are under pressure. We always thought that this was an area of the economy that would sustain any downturn, but it isn’t.”
Ebitda was positively affected by the closure of the Fish River Sun resort and the International VIP Business in South Africa and Panama as the group continues to focus on its core businesses.
Adjusted headline earnings decreased by 44%, with adjusted headline earnings per share down by 47%, which was attributed to the interest impact of debt and increased depreciation of the relatively new Time Square.
Income from Colombia was hurt by the closure of the Sun Nao Casino in December 2017 as outstanding rental for the casino was settled at US$1.5 million, $2.3 million below the amount provided for.
Foreign exchange risk
The results show a foreign exchange loss of R30 million on intercompany and minority loans (compared to a profit of R12 million reflected in June 2017). Leeming highlighted a $50 million loan to Nigeria, which would be recognised as a foreign exchange gain in South Africa but was conversely realised as a foreign exchange loss in Nigeria, given the weakness of the naira. Nigeria remains a tough space for Sun International given the foreign exchange risk and slower economic growth attested by the R12 million operating loss.
The R1.6 billion secured in its oversubscribed equity capital raise takes Sun International’s overall borrowings to R15.1 billion as at June 30.
Shapiro attributes the group’s debt appetite to the capex-reliant gaming arm, which is the primary contributor to group’s income at 73%.